Here is what I would do in terms of applying his thinking into a modern day investment approach:
1. Do what you do best. Some investors are made for short-term trading. Others are much more suited for long-term investing (like me). Donât be shy to utilize whatever edge you may have. MPT (modern portfolio theory) suggests that markets are efficient. Nothing could be further from the truth. If you have spent your entire career in the medical device industry, the chances are that you understand this industry better than most. Use it when managing your own assets. Insider trading is illegal; utilizing a life time of experience is not.
2. Take advantage of mean reversion. Mean reversion is one of the most powerful mechanisms in the world of investments. At the highest of levels, wealth has a long term âequilibriumâ value of about 3.5 times GDP. As recently as 2007, wealth was well above the long term equilibrium value and signalled overvaluation in many asset classes. But be careful with the timing aspect of mean reversion. The fact that an asset class is over- or undervalued relative to its long term average tells you nothing in terms of when the trend will reverse. A good rule of thumb is to buy into asset classes when they are at least a couple of standard deviations below their mean value.
3. Be cognizant of herding. We are all guilty of keeping at least one eye on other investors, and we are certainly guilty of letting it influence our own investment decisions. This is how investment trends become investment bubbles and fortunes are wiped out. Herding is relatively easy to spot despite the fact that former Fed chairman Alan Greenspan argued otherwise â probably because it was a convenient argument at the time. But herding is also subject to the greater fool theory. You can make a lot of money investing in fundamentally unsound assets, as long as you can find a greater fool to whom you can sell it at a higher price. It works fine but only to a point.
4. Think outside-the-box. All those millions of baby boomers all over the western world who will retire in the next 10-15 years have been told by the MPT-trained financial advisers that they need to lighten up on equities and fill their portfolios with bonds, because they need the income to live on in old age. STOP! Who says that bonds canât be riskier investments than equities? When circumstances change, you should change your investment approach accordingly and not rely on historical norms. Given the state of fiscal affairs in Europe and North America, it does not seem unreasonable to suggest that circumstances have indeed changed.
5. Bring non-correlated asset classes into the frame. As alluded to in footnote 4, one should consider having a core allocation to non-correlated assets. Traditionally, many non-correlated asset classes have not met the liquidity terms required by the majority of investors (see below on liquid versus illiquid investments), but there are exceptions, the most obvious one being managed futures. The asset class proved its worth in 2008 with managed futures funds typically up in the range of 20-30% that year.
6. Take advantage of investor constraints and biases. The classic, but by no means only, example is the outsized impact a downgrade to below investment grade (i.e. a credit rating below BBB) may have on corporate bonds, as some institutional investors are not permitted to own high yield bonds and are thus forced to sell regardless of price when the downgrade takes place.
My favourite example right now is illiquid as opposed to liquid investments. I strongly believe that less liquid investments will outperform more liquid ones over the next few years for the simple reason that the less liquid ones are struggling to catch the attention of investors who, still smarting from the deep wounds inflicted in 2008-09, stay clear of anything that is not instantly liquid. This has had the effect of pushing the illiquidity premium (i.e. the extra return you can expect to earn by investing in an illiquid as opposed to a liquid instrument) to levels we havenât seen for years.
At Absolute Return Partners we believe it is possible to earn attractive returns on investments which are not particularly sensitive to the ups and downs of the economic cycle provided you are prepared to commit to a 4-5 year investment period (which, by the way, does not imply that other risk factors do not apply). As these types of investments require a certain level of sophistication from participating investors, I cannot write about them in this letter; however, if you feel that such investments may be appropriate for you, feel free to call or email me for further information.
What investors need is relevant knowledge & wisdom. Knowledge is more than data & information. It involves understanding. Wisdom is applying the knowledge. Wise investors do not lose their cool easily. They are not over-driven by greed, fear or pride in their investment decisions. They know when to cut loss & when to hang on. They are able to differential between sheep & goat; the good the bad & the ugly; Which are seasonal which are all seasons & which are in the sunset business. They let their money work for them but not working for the money. They know when to cherry pick & when to cash out, what to keep & what to let go. Companies' cash flows & a strong sheet are necessary to support the ability of a company to survive & grow it's revenues & earnings into the future.
A record 10.6 billion shares changed hands yesterday in a frenzied day of trading. The total value traded is $1.69 billion as investors targeted cheap speculative stocks, average value per share of 16 cts.The latest bull run is already 3 months. The market is having dificult in staying above ST 3300. In any bull market when attention switch to penny stocks in a frenzied day of trading, what does it tell us?Be wise, don't get burn.
Reporting season is on, every quarter results of S-Chips are unpredictable. If they are unexpectedly bad, their shares will drop. If they are good, most investors will not believe the financials anyway or trust the Mgt to continue the good work. A no win situation. A good example is Ducang which release a set of solid result but the share price stay grounded. The market know what we don't know. Yet I notice hopeful people still loading up the stock. A few S-Chips share price are trading below the cash per share value of the companies. Why is this so? Remember, chinaman are no fool.
This bull market already having a good run for 3 months, we should review our pofolios. Better to sell when the share prices run ahead of fundamentals and wait for dips to buy. Market correction or crisis create the best opportunity.
Not a good idea to chase shares when markets run up too quickly .When following tips blindly, the tendency is to buy at higher prices than the tipsters and worst, you don’t know when to sell ?
There are many people speculating in stocks & shares don't even know the value of the stocks. To them share trading at 5 cents is cheap & another stock trading at $5 is expensive. The popular penny stocks tend to be financially strapped companies that are hardly worth the price investors are paying them. Re: speculating pennies is a zero sum game. Someone will win & someone will loss. Who will usually loss? It's just an advice. Remember history will also repeat itself
Investing in stocks involves risk taking, but investors who pick companies with strong fundamentals and have a long horizon, invariably succeed.
Â Investing in high dividend yielding stocks is considered a safe bet by many analysts. That’s because only those companies that are confident about future earnings and have strong cash flow tend to distribute dividends
Â There is a common misconception that capital appreciation from high dividend stocks are lesser compensating via dividends
Â Dividends provide assurance to investors with a steady flow of income. Such stocks are as asset in one’s portfolio when markets turn bearish.
Â As reqard to the high dividend yield stocks, I have vested in Second Chance, Chip Eng Seng, Cordlife, Metro, Stamdford Land, First Reit & Cambridge Reit which gave me passive income. For the Reit, I have not only received high dividend but also capital gain. My reason for these 2 Reit are:
Â First Reit Trading at $1.10 dividend yield is still about 6.5%. It's in health-care business which is resilence. Leverage is the lowest but have seen been increase from 16% to 31% which is still lower than most Reit. First Reit have good management in sponsor parent Lippo Group. At the pointÂ when IÂ vested, dividend yield is about 18%. Just recently I have sold down by half my holding.
Â Cambridge Reit Trading at 75 cents dividend yield is still about 7%. I had vested in this stocks because of the Lam Soon Industrial Building.
Â Cambridge Reit has 97 units freehold strata in Lam Soon Industrial Building represent 69.44% of the building total share value. The 230.915 square foot freehold site, with a gross plot ratio of 1.92, had an indicative price of $330 million. Inclusive of development charge of $80 million, indicative price worked out to about $925 per ft per plot ratio. CIT purchased the 97 units in 2006 for $72.2 million. So there is a good opportunity for it's to unlock value. On top of that at the point when I vested, dividend yield is about 10%.
Â As for the other Reit which have good management such as Capital Mall, Ascendasreit & Mapletree the dividend yield is about 5% which is not so attractive. At 5% I believe the downside is more than the upside.